With Indonesia experiencing an infrastructure deficit of $1.5trn according to the World Bank, state-owned enterprises (SOEs) increasingly rely on debt to finance investment. Therefore, some SOEs have opted to issue rupiah-denominated bonds – known as Komodo bonds – on offshore exchanges, to not only raise capital for projects, but also to mitigate foreign exchange risks.
Toll road operator Jasa Marga emerged as the first SOE to issue a rupiah-denominated bond on the London Stock Exchange (LSE) in December 2017. Valued at Rp4trn ($284m) and with a coupon rate of 7.5%, the bond was oversubscribed at Rp15trn ($1.1bn) and will mature in December 2020. Stateowned construction firm Wijaya Karya followed suit in January 2018, listing a three-year, Rp5.4trn ($383m) bond with a coupon rate of 7.7%, again on the LSE. This issue was oversubscribed by two and a half times. While this is not the first time rupiah-denominated bonds have been listed on the LSE, it is the first time Komodo bonds – rupiah-denominated bonds for SOEs – have been listed. “In total, 43 rupiah-denominated bonds have been listed on the LSE, raising £3.6bn,” Shrey Kohli, director of fixed income and funds at LSE, told OBG.
Komodo bonds are named after the Komodo dragon, a species of giant monitor lizard inhabiting Indonesia’s East Nusa Tenggara province. These fixed-income debt instruments have provided a viable alternative financing option for SOEs, especially due to the depreciation of the rupiah in 2018.
“Komodo bonds are an attractive option for Indonesian corporations seeking a sizeable rupiah-financing source from outside Indonesia,” Mardy Sutanto, president director of domestic investment services firm BCA Sekuritas, told OBG. “Since the bond is denominated in rupiah instead of the dollar, the investor carries the risk if the currency depreciates.” The potential of these bonds to help domestic firms diversify their foreign investor base and access alternative sources of capital is therefore considerable. Indonesian SOEs occupy a large market share across various sectors. These firms are in a prime position to issue bonds, as they are unlikely to default due to their government backing and low liquidity risk. Furthermore, while dollar-denominated bonds traditionally have a coupon rate below 7%, Komodo bonds have offered a rate above this figure.
Komodo bonds are denominated and hence traded in rupiah, but investors subscribe in dollars. The issuer then converts these dollar proceeds to rupiah and purchases the dollar equivalent to meet its coupon payments. Therefore, the decision of the US Federal Reserve to raise interest rates four times in 2018 may cause issues for SOEs that must meet payment obligations once the bonds mature.
“Although we are seeing a strong performance by primary Indonesian issuers in the market, US Federal Reserve hikes have an impact in the sense that bond coupons increase, ceteris paribus,” Andy Bratamihardja, managing director of local investment banking and brokerage firm Mandiri Sekuritas, told OBG. However, another challenge relates to fiscal ramifications. “One of the key issues concerns taxation on coupon interests,” Sutanto told OBG. “Since Komodo bonds have been issued offshore, the additional cross-border withholding tax could present a potential cost hindrance.”
Despite no further issuances in 2018, other SOEs – including utilities companies Perusahaan Listrik Negara and Telekomunikas Indonesia – have expressed interest in drawing on Komodo bonds to help finance future projects. Although only two Komodo bonds have been issued so far, the new infrastructure mandate that is expected to follow the April 2019 elections, combined with recent indications that the US Federal Reserve will not raise interest rates further in 2019, could provide fresh impetus for new offshore Komodo bonds in the future. “There is room for improved margins in the pricing of bonds, as investors generally seem to be positive about Indonesian issuers despite the challenges faced,” Bratamihardja told OBG.